Wednesday, July 27, 2011

Virgin Enterprise off to Geneva to shirk tax

Copied from the Treasure Islands blog:

From The Telegraph:

"The company that owns the rights to the Virgin brand around the world is planning to relocate from London to Geneva in the coming weeks in a move that will reduce its tax bill. . . . A source said the decision had been made to maximise “tax efficiency”.

Shifting a brand offshore is a classic abusive transfer pricing move to avoid tax. Here's what happens.

First, the offshore subsidiary that owns the brand charges huge fees to other parts of the company - fees that it's very hard for Revenue authorities to challenge (just how much, exactly, is Virgin's brand worth?). Next, that offshore subsidiary makes huge profits, by virtue of charging those huge fees. But because it's in a tax haven, it pays little or no tax on those profits. And as for the 'onshore' subsidiaries in high-tax countries: well, they can then offset those huge fees as costs, against tax, cutting their tax bill.

Hey Presto! A tax bill evaporates!

Overall, nobody, anywhere, has produced a better, more efficient air service, record company, widget or whatever. All that's happened here is that money has been transferred away from hard-pressed taxpayers, to people like Richard Branson and his fellow shareholders. And pressure is put on countries to lower their tax rates to stay ahead in this awful race to the bottom. (If you don't believe that, just look at the tone of that Telegraph story, or the Daily Mail story that followed.) Britain's already large deficits get that little bit wider, creating additional risks in an already precarious situation. Smaller competitors get killed, for no good economic reason, on account of a tax subsidy that is available to bigger players, but not to them. Markets are made less efficient on account of the costs of expensive tax advisers, lawyers, bankers and so on.

This is bad, harmful, egregious stuff that's happening.

How important is this kind of abusive tax practice to the Virgin empire? Well, it's hard to know exactly, but in 2002 Branson was quoted in this way:

"Virgin's offshore status has been crucial to its development: it allowed money to move from business to business without massive tax liabilities. "If we had not done it the way that we did, Virgin would be half the size that it is today," argues Branson."

So overall the rich get richer, the poor get poorer markets get distorted, and there is no net benefit to the world of any kind. Quite the opposite.

People like Branson get awards all the time. No doubt he's a good businessman in some ways. But this stuff counts as a serious, serious black mark against his name, during these times of national strife.

What is interesting about this is the comments under the Telegraph story - readers are generally a right-wing bunch, but most of the ones under this story, at least at the top, are unremittingly hostile to Branson's move. Perhaps that comes more from feelings of patriotism than anything else, but still, it's interesting.

Oh, and as for that term 'tax efficiency' - see TJN's dictionary of offshore obfuscation.

And then there are things like Branson's private island in the British Virgin Islands.


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